Learn How This Legal Concept Helps You

When you buy a new home, there are a few different types of property ownership that you may choose. Whether you're living with a spouse, friends, or roommates, dividing living spaces and expenses can get complicated. Aside from the day-to-day responsibilities of owning a home, decisions about property ownership can impact your legal rights, financial responsibilities, and what happens to the home in the long term. Understanding how a joint tenancy works, especially in comparison to similar alternative housing options, can help you determine which form of ownership fits your needs.

Joint Tenancy Definition

A joint tenancy refers to two or more people sharing equal ownership over an asset or real estate property. This type of tenancy can be used by married or unmarried couples, often chosen because of the way property ownership is divided and transferred between co-owners under a joint tenancy's "right to survivorship".

Joint tenancy is explained in titles and deeds. On a property title, a joint tenancy determines how home ownership is legally shared between co-owners, while the deed is the document that officially records that ownership arrangement when the property is transferred.

Joint Tenancy vs. Tenancy in Common

Tenancy in common is similar to joint tenancy. However, joint tenancies require all owners listed on the property title to own equal shares of the asset, while tenancies in common allow two or more parties to own unequal ownership percentages. This means a couple can choose a traditional 50/50 ownership, or divide it in other ways, such as 60/40.

• Ownership shares: In joint tenancy, all owners hold equal property interest (ownership), while in tenancies in common, owners can hold unequal shares, meaning one person can own a larger percentage than the other.
• Rights of Survivorship: In joint tenancy, if one homeowner dies, their share of the property is automatically transferred to the surviving owner(s).
• Transfer of Interest and Selling: Under tenancies in common, owners can transfer or sell their property interest without permission or approval from other owners, and without penalty. In joint tenancies, all owners must receive ownership at the same time through a property deed. If one party chooses to sell or transfer their interest, this will dissolve the joint tenancy, turning it into a tenancy in common.

Before selecting your ownership arrangement, carefully consider how you'd like to divide a property and your long-term plans for the property.

How Joint Tenancy Works

Joint tenancies grant two or more people equal ownership of the same property. For the joint tenancy to be legally valid, it must typically satisfy the "four unities". This is a set of requirements that ensures each owner holds the same rights and responsibilities.

1. Time: All parties must receive their interest and property shares at the same time.
2. Title: All owners must obtain their ownership rights through the same legal document, such as a property deed or a court order.
3. Interest: Joint tenants own an equal stake in a property.
4. Possession: All owners have equal rights to possess and use the entire property.

State laws can vary in their joint tenancy requirements, so be sure to check your local requirements.

Joint Tenants with the Right of Survivorship (JTWROS)

Joint tenants with the right of survivorship (JTWROS) is a type of joint tenancy that allows for easy transfer if an owner passes away. When this happens, the remaining owners gain ownership of their share in the property. It is often used by both married and unmarried couples who want a seamless housing agreement and plan for the future of property ownership.

How Joint Tenancy Affects Your Mortgage

Joint tenancies can impact how you pay for your mortgage when you buy a property with co-owners.

Joint Liability for the Mortgage Debt

In joint tenancies, all owners are held equally liable for any debt tied to the property, including the mortgage, property taxes, and maintenance costs. Therefore, lenders can pursue one owner for the full amount of the loan if another owner defaults. Creditors may also withhold the right to seek full repayment from any owner in the case of financial difficulties caused by one party.

Credit Score Requirements for Co-Borrowers

When you apply for a joint tenancy, lenders will review the loan applicants and the credit scores of all applicants. In most cases, lenders will use the lowest of all borrowers' credit scores, based on the median score from the three credit bureaus of each applicant. If one applicant has great credit, while another has low credit scores, the lesser scores can significantly impact approval rates, interest charges, and terms of the loan.

On the upside, joint tenancies allow prospective homeowners to combine incomes on their application to increase the likelihood of satisfying other lender requirements, such as maintaining a debt-to-income ratio lower than 50%. If a borrower's credit score falls short, taking the steps to improve your credit score before applying can help you qualify for better loan options.

Refinancing a Jointly Held Property

Refinancing a jointly held property requires the consent and signatures of each co-owner. Regardless of who lives at the property or makes financial contributions, no single owner can refinance the property independently under a joint tenancy. This is where equal ownership can complicate the process, especially when adding or removing an owner from the mortgage. This could mean refinancing a loan entirely or restructuring the ownership agreement. Understanding these prerequisites is critical before entering into a joint tenancy.

Pros and Cons of Joint Tenancy

Here are some pros and cons to help you determine if a joint tenancy is right for you.

How to Establish or Terminate a Joint Tenancy

Establishing and terminating a joint tenancy involves altering how the property is legally titled. Creating one typically requires listing each owner on the same deed, while terminating one can be accomplished in several ways.

Creating Joint Tenancy During the Home Purchase

Creating a joint tenancy amid a home purchase requires all identified buyers to be listed on the same deed as joint tenants at the time of the sale. Ownership must be transferred simultaneously to all parties through a single document, with each party holding equal shares in the property. These arrangements and documents are usually confirmed during the closing process once the deed is signed and recorded with local authorities.

Converting an Existing Title to Joint Tenancy

Converting an existing title to a joint tenancy usually means creating and documenting a new deed that clearly lists the property's title owners and their equal ownership as joint tenants. Quitclaim deeds and survivorship deeds are common choices in this instance. All parties must agree to sign the new deed, and for it to be notarized by the local authority.

Terminating a Joint Tenancy

There are several ways of ending a joint tenancy; some can vary by state laws and specific circumstances. Here are some of the most common ways to go about terminating.

• Sale or Gift: When one owner sells or gifts their stake, their share in the joint agreement becomes severed. This would make the new owner a "tenant in common" with the remaining owners.
• Transfers to a third party: A borrower transferring their share to a new party would disrupt, and most likely eliminate, the joint aspect of the habitating agreement.
• Buyouts: If one owner makes an offer to purchase another tenant's interest in the property, this can be another way of severing a joint tenancy. This would either result in one sole owner or the restructuring of the agreement among the remaining owners.
• Divorce proceedings: For married joint tenants, divorce typically results in terminating the joint tenancy. Divorce may also lead to property division, sale, or conversion to another form of ownership depending on the terms of the settlement agreement.
• Court orders: If co-owners disagree over their housing arrangement, tenants can seek help from a judge who can terminate joint tenancy by issuing a partition action. Partition actions establish clear boundaries through the property and allocate equal portions of land to each party.
• Mutual agreement: This is when all owners unanimously agree to sever their joint ownership. This can be achieved through selling or changing the ownership structure.

If you're someone considering a joint tenancy, be sure to consult with a real estate or legal professional to ensure clarity and a smooth transition.

Joint Tenancy FAQs

Here are some more commonly asked questions about joint tenancy.

What Happens if One Owner Wants to Sell During Joint Tenancy?

If one owner chooses to sell their stake in the property, they may do so without the consent of other tenants, but this would terminate the joint tenancy and convert it into a tenancy in common.

Does Joint Tenancy Override a Will?

In most cases, a joint tenancy will override a will. Much of this is because of a joint tenancy's right to survivorship, which automatically passes ownership onto surviving tenants, regardless of what a will may state, which is why it's an important consideration in estate planning. However, if a deed is invalid, or if the joining tenancy was legally severed before one owner's death, these could be some of the limited exceptions to this rule.

Is Joint Tenancy the Same as Community Property?

No, a joint tenancy is not the same as community property, despite both involving shared ownership between at least two people. In comparing a joint tenancy vs community property, a critical difference is tax treatment. Joint tenancy typically provides a step-up in basis on only the deceased owner's share, while community property may allow a full step-up on both halves.

Final Thoughts: What Is Joint Tenancy?

Joint tenancy is a great option for homeowners looking for a practical way to share and divide property, especially if they're looking for equal ownership and responsibility. It does come with some unique terms, like the right to survivorship–when the rights of a deceased owner are transferred to the surviving owner(s).

While equal ownership has its pros, it also means equal liability, making all owners equally liable for any debts associated with the property. It's also important for borrowers to consider how this structure will affect their long-term housing goals, such as selling the home or passing it down to future generations. If you're ready to make the next step toward home ownership, get prequalified online today to get a better idea of what you can afford.